Debt Evokes Dread as It Nears $20 Trillion, but Others Take It in Stride

By Jonathan Nicholson

Ronald Reagan was president and Eddie Murphy starred in “Beverly Hills Cop II,” when the Treasury Department, to fund that year’s annual federal deficit, issued a 30-year bond in May 1987.

This May, barring catastrophe, the Treasury plans to finally pay off that bond, CUSIP 912810DY1, which has steadily paid bondholders interest at an 8.750 percent rate twice yearly over time. But the rest of the national debt, the collection of federal government obligations accumulated through years of continued deficits, could top $20 trillion later this month.

Exceeding that milestone in the public debt will probably precipitate much hand-wringing on both sides in Congress. In the past, Republicans have said rising debt means it’s time to trim major spending programs on autopilot, like Medicare. Democrats have said the debt should mean increased wariness of tax cuts or a tax overhaul that leads to less revenue.

President Donald Trump may have already given a preview of that debate after he said in a Feb. 25 tweet that the press was not giving him credit for a minor downward fluctuation in the daily amount of debt outstanding since he took office.

‘Car’s Getting Old.’

For economists, the number doesn’t mean that much.

The debt level is important, but the actual increase to $20 trillion is comparable to a car’s odometer rolling over from 99,999 miles to 100,000, Nancy Vanden Houten, senior research analyst with Stone & McCarthy Research Associates in Princeton, N.J., said.

“Your car’s not going to stop running because that thing has occurred but you know the car’s getting old and you’re going to have to do something,” she said.

Rudolph Penner, a former director of the nonpartisan Congressional Budget Office and fellow at the Brookings Institution think tank, compared the debt level to the stock market.

“It’s something like the Dow going over 20,000. It’s a much more symbolic than real effect,” he said.

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As of Feb. 28, the public debt stood at a relatively small—by federal accounting standards—$40 billion away from $20 trillion, at $19.960 trillion. Ironically, given the government is projected to run a deficit well above $500 billion this year, the one thing that could keep the debt from topping $20 trillion in March, at least temporarily, is the federal debt limit.

Debt Limit Delay?

A portion of the public debt is subject to the congressionally set debt limit restriction, which has historically taken the form of a specified amount beyond which debt cannot be issued. Because the government has run a deficit annually for all but four years since 1970, the debt limit has had to be increased or suspended outright periodically to allow the Treasury Department to keep borrowing money to keep federal operations going.

On March 15 the current suspension, put in place in 2015 (Pub. L. No. 114-74), will expire. The next day, the debt limit will reset at a higher level, reflecting the debt incurred during the suspension period, an increase of about $2 trillion since November 2015.

The Treasury, if it follows past practice, will then be forced to take accounting moves to keep below the ceiling. Those measures could maintain Treasury’s ability to borrow for several months, possibly until September, or as late as November. During that time, the debt subject to the limit, which makes up the vast majority of the public debt but not all of it, would remain frozen, while the extraordinary measures were in place. If the debt is below $20 trillion when Treasury begins its accounting moves, it could easily stay below it until regular borrowing is resumed.

Vanden Houten said her projections showed the public debt was unlikely to tip over $20 trillion until the second half of March, though she said there was some uncertainty in that forecast. When it does happen, lawmakers said they expect to hear and talk about it.

Debt Threatens Viability

“Whether it’s $19.9 [trillion] or $20 [trillion], it is probably the most important crisis that we have in front of us right now,” said Sen. David Perdue (R-Ga.), who keeps in his office an electronic “clock” that tracks the debt. “It threatens the ability to fund our military. It threatens our ability to provide safety nets to the people who really need it. It really threatens our viable position as a leader of the free world.”

Sen. Angus King (I-Maine) said: “People should pay a lot of attention to it. It’s mortgaging our children’s future.”

Not all public debt is created equal. While the focus will be on the total, economists sometimes distinguish between the publicly held debt—the accumulation of Treasury bills, notes and bonds auctioned several times a week by Treasury—and a separate type of security, those issued to federal trust funds as assets for the Social Security and Medicare programs.

As of Feb. 28, the publicly-held debt totaled about $14.411 trillion out of $19.960 trillion total public debt, while the government-owned debt—Government Account Series (GAS) securities in Treasury parlance—added up to about $5.548 trillion. The latter category represents debt the government owes to itself, in contrast to the debt owed to investors.

U.S. Debt Owed to U.S

Because the GAS series is debt the government owes to itself, akin to home equity loan a homeowner takes out, some economists downplay its importance as part of the debt burden. That is not to say it has no impact. The twice-yearly interest payments made on securities in the Social Security trust funds are currently the margin between the program losing money each year—and having to draw down its assets—and staying, for a few more years at least, in the black.

“They’re both concerning,” said Vanden Houten. The financial markets look at the publicly held debt, she said, but in a few years the Social Security trust funds will redeem their holdings and the money to make good on those securities will be raised by public debt sold to investors. “Those IOUs come due,” she said.

Regardless of the distinction between the two types of debt, both Vanden Houten and Penner said the trajectory of the overall debt is worrisome. Overall debt was larger than the size of the entire U.S. economy in 2012, the first time since 1947 it topped 100 percent of gross domestic product.

Just counting the debt held by the investing public, the same trend was evident. In January, the CBO said just that portion of the public debt was projected to be at 77.5 percent of GDP in 2017 and to rise to 88.9 percent in 2027.

‘Termites in the Attic.’

Penner said the debt rising is analogous to “termites in the attic.” While they may not be an immediate concern, they should be dealt with eventually or risk the structural integrity of the house. “That is the ultimate fear,” he said.

So what do lawmakers see as the correct response to tipping over $20 trillion in debt? It depends on whom you ask.

Sen. Ron Wyden (D-Ore.), the ranking member of the Senate Finance Committee, said the commitment to Medicare shouldn’t be questioned, but health care and military spending both need to be trimmed.

“I think it buttresses the case that we have to get serious about tackling these long-term issues. That involves holding down health-care costs and my bipartisan bill to audit the Pentagon and go after inefficiencies in the big-ticket items,” he said. “Those are the things that are the big drivers of the long-term fiscal picture.”

King focused on taxes. “We’re talking about passing tax cuts that will simply be passed on to our children, so I’m very concerned about it,” he said. “It puts us in a very vulnerable position, especially with regard to interest rates.”

Perdue, however, said incurring more debt in the short term may be necessary to rein in debt over the long run.

“In any turnaround, sometimes you have to take a step back and then go forward,” he said. “We have infrastructure, some of these tax changes that are growth-oriented long term, I’m willing to look at those things. Because what I’m looking at is the long term—this debt crisis is so deep, we are not going to fix it in three or four years.”

To contact the reporter on this story: Jonathan Nicholson in Washington at jnicholson@bna.com

To contact the editor responsible for this story: Paul Hendrie at pHendrie@bna.com

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